3 Reasons 2015 Will Be A Big Year For Global Trade

2015 is shaping up to be a big year for the global economy. The U.S.-led free trade agreements have new life. The U.S. and China reached a monumental agreement on information and communications technology tariffs. And India and the U.S. came to consensus on food stockpiles that helps bring the World Trade Organization’s Trade Facilitation Agreement (TFA) one step closer to reality. The U.S. cannot squander this opportunity.

Photo courtesy of Reuters.
  1. On the U.S. FTAs: The Trans-Pacific Partnership (TTIP) and Trans-Atlantic Trade and Investment Partnership (TTIP) have returned to the conversation among policymakers as something the President and Congress can accomplish during the lame-duck session. The success of these agreements hinges on the President and Congress re-enacting the Trade Promotion Authority to allow negotiated trade deals to be voted on in Congress without having them picked apart. And, as we noted in our previous report, there are substantial benefits to TPP countries due to intellectual property-intensive industries that are vital to prosperity, innovation, and competitiveness of all countries in the TPP. 
  2. On U.S./China ITA: The U.S. and China finally agreed to adopt an updated Information Technology Agreement (ITA) that eliminates tariffs on trade for hundreds of information and communications technology (ITC) products. These tariff eliminations, which stood at a range from 8 percent for medical devices to 30 percent for video game consoles, are massively important for the U.S. economy and consumers. The ITA expansion is estimated to increase U.S. exports by $2.8 billion, advance revenues of U.S. companies by $10 billion, and create 60,000 new jobs. Overall, the agreement stands to increase global GDP $190 billion annually. 
  3. On the WTO’s TFA: The U.S. and India reached an agreement over food stockpiles that pulls the Group of 20 major economies closer to consensus on the Bali Agreement. The agreement would be the biggest trade deal in the WTO since its inception. The TFA will remove delays at border crossing and ports by bringing uniform standards at customs and ports. The WTO estimates TFA will stimulate the global economy by $1 trillion. 

The opening of global markets beyond the incremental steps taken over the past few years is a great thing for a sputtering global economy. Businesses benefit by having access to many more customers. Consumers gain access to goods and products are lower prices and a greater variety. Washington has a grand opportunity to lead on global trade. It better not spoil it.

The Adverse Effects of Reducing the Mortgage Interest Deduction

Tax reform is on the table, again. The mortgage-interest deduction (MID), as expected, continues to be a contentious issue for policymakers. In his latest proposal, Rep. Dave Camp (R-MI) calls to reduce the limit on qualified home mortgages for MID to $500,000 of principal from the current level of $1 million. While the prospects for a complete overhaul of the tax system are unlikely before the 2014 midterm elections, understanding issues like the MID are important for future debates.

The Wall Street Journal’s recent piece on the MID helps explain the divergent policy perspectives on the deduction as a policy instrument. The Brookings Institution argues that the MID needs to be revamped or replaced. Brookings argues that homeownership in the U.S. is not higher than those in other developed countries who do not have the MID. On the opposite side, the Hudson Institute provides another perspective that supports the benefits of the MID. The Hudson Institute points out that it’s incomplete to just compare the MID in the U.S. and other developed economies to analyze the homeownership. For example, while the United Kingdom and Canada do not specifically have the MID, they do have specific policies that encourage overall homeownership.

While the jury is still out on the magnitude of the impacts of the MID, the elimination or reduction of the MID will affect the real estate markets, millions of American homeowners and renters, and ultimately the health of the U.S. economy. The elimination or reduction of the MID is an equivalence of a tax hike policy that will affect the purchasing power of homeowners and renters negatively. When the component of housing expenditure increases, the negative income effects will reduce purchases of other items across all income groups.

Since housing expenditures make up a larger share of total household expenditures of the middle-income than higher-income groups, the relative values of the MID are in fact larger for the middle-income groups. Under the current U.S. tax code, the MID can only be claimed if a taxpayer itemizes their deductions. The limit of the mortgage principal might need to be expanded, and not reduced, to benefit the lower-income groups who do not itemize their tax filings. Policymakers must understand and measure the potential short- and long-term impacts of the elimination of the MID on the housing market and broader economy before tax reform passes through Congress.